Diageo, Unilever and Facebook: Lessons Learned Around FX Volatility

All organisations, from sole traders to the world’s biggest brands face overseas costs in some way, shape or form. From the immediate costs of foreign exchange, international payments and logistical costs to less obvious influences such as price changes due to an increase in supply chain costs or a slowdown in demand because currency costs have made locations cost inefficient.

Trade Finance Global heard from Stephen Hubble, Chief Analyst at Centtrip, on how even the largest businesses struggled to deal with currency volatility and market uncertainty as a result of the current climate.

Take, for example, Diageo. Once the world’s largest distiller and proudly counting Smirnoff, Johnnie Walker, Baileys and Guinness in its portfolio, the drinks group warned last September that currency fluctuations and volatility in emerging markets had hit its full-year profits with sales £454 million lower during the financial year ended 30 June 2018.

Unilever is another such example. The multinational company said its revenue and profit decreased by 8.9 per cent, according to a company transcript, as trade tensions between the US and China continued to ruffle corporate earnings. Facebook also felt the pinch, having partly attributed its slower-than-expected growth to currency swings.

Unprotected exposure

The key learning from this abridged list of examples is that no one is immune from currency fluctuations. However, whatever the size of your company, if you trade overseas you can still manage these sudden swings well and minimise their negative impact on your business, or in some cases even to take advantage of them. How?

To increase protection against such volatility, corporate financial masterminds have turned to anything from reinforcing currency-risk management to throwing more funds into the pot, to trading bots. Whatever you do, a good place to start is by getting a better understanding of what you are actually paying for and how much you are paying.

4. Volatility chart showing swings over the past 60 days of Brexit negotiations (Source: Bloomberg)

We all know that some fees are quite upfront, but some can be less obvious (more “hidden”).

Having a complete understanding of what they are puts you in total control of your complete international cost base. The new breed of companies, aka FinTechs, can help business owners looking for greater control and the confidence to expand globally more easily.

Uncertain times

Brexit has caused a great deal of uncertainty for individuals and businesses.

However, there is a way to counter its negative impact and the best place to start is by making a plan. Chief Analyst Stephen Hubble suggests the next three to six months could be key, so now could be a good time to understand where you are at and where you would like to be and set a course for your business to withstand ongoing Brexit storms well.

Plan ahead

There are a few simple steps you can take to make sure you have sufficient stock of products and currency.

Some UK businesses rely on a global supply chain for materials, components and other goods. With Brexit uncertainties far from abating, they may find themselves at a disadvantage, having to pay more than they used to for the same materials.

If that is you, consider purchasing sufficient goods outright to avoid any disruption to your supply chain. It does mean you may need to make extra provisions like having a bigger warehouse to store additional stock. However, this could be the difference between your business continuing uninterrupted operations and not having stock to sell.

Hedging proportions

Why not take a similar approach to buying currencies, protecting costed levels and profit margins? It is possible and is worth fixing costs using forward contracts. These are some of the more essential treasury costs you can pre-empt and avoid for your business.

Forward contracts enable you to lock in an exchange rate in your preferred currency for up to two years, and hence giving you certainty and helping you develop a clear financial plan that takes the agreed exchange rate into account while ensuring healthy cash liquidity for whatever Brexit may bring. It is an efficient hedging tool that enables you to offset the financial risk of any adverse price movements at a minimum cost to your bottom line.

Traditional forward contracts will require a small securitisation deposit, which is minimal and held against the contract for the duration of the term. Typically, it will be 2-5 per cent of the transaction value.

If you want to give yourself flexibility, why not hedge a proportion of your exposure? Maybe 50 per cent of what you might need. This blended solution would also enable you to take advantage of any upside, if rates go up.

Go digital

Consider using new technology from new incumbents such as FinTechs.

Almost one-third of businesses believe that high-street banks offer a competitive exchange rate, while nearly one-quarter do not consider a specialist FinTech company as a cheaper alternative, according to our survey of 500 key decision makers at medium-size and large companies. It can be easier to default to established relationships, but this is not always the most time- and cost-efficient option available. Today’s intelligent treasury management technology like Centtrip’s can speed up your foreign exchange and international payments, and often at a fraction of what you used to be charged.

Set your rates

New financial technologies also give you more control and flexibility when it comes to setting rate alerts. Centtrip’s web app allows you to achieve your target rate despite the volatility that is inherent in the market.

That said, it is also good to be able to speak to a specialist. Whether you need help with monitoring the markets, navigating currency fluctuations and understanding when is the best time to exchange currencies whether you are an importer or exporter. At Centtrip we have a talented team of market experts who are always on hand and would be very happy to help with your currency requirements, business activity and cash flows in the short, medium or long term to ensure you take advantage of those market movements.

Centtrip is a London-based FinTech company specialising in intelligent treasury management, fast and reliable payments and transparent foreign exchange. The fintech’s proprietary technology helps small, medium-size and large companies with their individual business needs, including automating processes, making payments in multiple currencies and delivering cost- and time-efficient business expenditure and real-time reporting.